83,547
edits
Template:M intro isda Party A and Party B: Difference between revisions
Jump to navigation
Jump to search
Template:M intro isda Party A and Party B (view source)
Revision as of 15:15, 2 December 2023
, 2 December 2023→Is it bilateral though?
Amwelladmin (talk | contribs) Tags: Mobile edit Mobile web edit |
Amwelladmin (talk | contribs) |
||
| Line 32: | Line 32: | ||
===''Is'' it bilateral though?=== | ===''Is'' it bilateral though?=== | ||
But there is a better objection: for all our automatic protestations to the contrary, the ISDA is not ''really'' a bilateral contract, and it ''is'' often financing contract, in | But there is a better objection: for all our automatic protestations to the contrary, the ISDA is not ''really'' a bilateral contract, and it ''is'' often financing contract, in economic effect even if not in formal structure. Where there is a customer gaining exposure to a risk and a dealer providing delta-hedged exposure to that risk, a swap is a sort of “synthetic loan”. | ||
We should not let ourselves forget: beyond the cramped star system of | We should not let ourselves forget: beyond the cramped star system of inter-dealer relationships, there is a boundless universe where one party is a “dealer” and the other a “customer”. This is the great preponderance of all ISDA arrangements. The ''customer'' and a ''dealer'' roles are different. They do not depend on who is “long” and who “short”, or who pays the fixed rate and who the floating. Hence the expressions “[[sell side]]” — the dealers, who sell exposure — and a “[[buy side]]” — their customers, who buy it. | ||
For a customer, the object of trading a swap is somehow to ''change'' its market exposure. For a dealer, the object of trading a swap is to earn a commission ''without'' changing its market exposure. Seeing as entering into a swap with a customer necessarily changes its market exposure, the dealer “delta hedges” that position by taking on an equal and offsetting position somewhere else. There are many ways of doing this: the most straightforward is to simply buy (or short) the underlying asset; but a dealer may equally hedge its market risk on one customer’s “long” swap position by matching it off with another customer’s “short” swap position in the same underlying asset. In any case, the basic idea of swap dealing, as with any kind of brokerage, is for the dealer to be as far as possible “market neutral”. Provided the dealer knows what it is about, its main risk in running a swap portfolio is not market risk but ''counterparty'' risk. | |||
Unlike most swap dealers, Hence, collateralisation is very important to swap dealers. | |||
===== Swaps are usually synthetic loans ===== | |||
By paying you a rate I am deploying my capital assets to gain access to a new capital asset, without having to get rid of the old one. Me paying a fixed rate implies I have a corresponding asset which will finance my swap payments. I am able to hold on to that and get synthetic exposure to a new asset paying say a floating rate, because my dealer has funded that asset for me. | |||
Isn't that also true of the dealer? No, generally not, because the dealer itself will be hedged. To pay your return it will have an offsetting transaction. It is not “keeping“ that floating rate risk, but offsetting it, perhaps with another client position. | |||
In recent years — ironically, just as the “dealer” vs “customer” dynamic has become more pronounced<ref>After the [[GFC]], bank proprietary trading fell away to almost nothing.</ref> — the global regulatory-industrial complex,<ref>This label is not just sardonic: there really is a cottage industry of of “regulatory change management professionals” who owe their last decade’s livelihood to ''accommodating'' quixotic regulatory initiatives like this. They are a powerful lobby with a direct interest in maintaining the rate of regulatory churn.</ref> still fighting last decade’s war, has forged rules which overlook this. | In recent years — ironically, just as the “dealer” vs “customer” dynamic has become more pronounced<ref>After the [[GFC]], bank proprietary trading fell away to almost nothing.</ref> — the global regulatory-industrial complex,<ref>This label is not just sardonic: there really is a cottage industry of of “regulatory change management professionals” who owe their last decade’s livelihood to ''accommodating'' quixotic regulatory initiatives like this. They are a powerful lobby with a direct interest in maintaining the rate of regulatory churn.</ref> still fighting last decade’s war, has forged rules which overlook this. | ||
| Line 55: | Line 66: | ||
Their failure shouldn't, typically, be a systemic risk unless their unusually size, interconnectedness or unintended system effects ''make'' them systematically important, in which case they should be regulated if they are systemically important, and made to hold capital, and (b) they have the market position and bargaining power to negotiate margin terms. | Their failure shouldn't, typically, be a systemic risk unless their unusually size, interconnectedness or unintended system effects ''make'' them systematically important, in which case they should be regulated if they are systemically important, and made to hold capital, and (b) they have the market position and bargaining power to negotiate margin terms. | ||